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Pressure on rents as 37,000 apartments vacant
June 3, 2017, 6:44 pm

The real estate market, which saw a softening in early 2017 with sales falling to KD180 million, appears to be continuing its lethargic performance.

Latest data from the real estate sector reveals that the number of apartments lying empty since the start of the year has nearly doubled from 20,000 to over 37,000 at the end of April. With more than 10,000 residential apartments poised to enter the market during the second half of the year, the situation is likely to be further exacerbated.

According to a report released last week by Kuwait International Bank, residential property deals in Kuwait declined by 42 percent in April compared to March due to sluggish market activity, with recovery depending on oil price rise.

A total of 305 deals worth KD89 million were registered in April, compared to 528 deals, valued at KD51 million, in March. Average deal value also fell by 27 percent compared to last month, reaching KD291,000 per deal, the bank said.

Sales in investment sector fell by 42 percent quarter-on-quarter and 51 percent compared to the previous year, reaching KD42 million. The sector registered 60 deals compared to 81 deals the month prior, with average deal value falling to KD706,000 per deal.

The number of investment apartments lying vacant is cause for serious concern. One of the main reasons behind this problem is the oversupply of residential apartments, which is believed to be much higher than the demand. The investment sector witnessed a rapid growth in the past two years. According to data from PACI, there are more than 13,000 investment residential buildings in Kuwait, a number that is considered high for a market the size of Kuwait.

Another probable reason for the increase in empty apartments is the increase in number of expatriates who are deciding to send their families back to their home countries. The average cost of around KD300 for an apartment is no longer viable for many expatriates, and with salaries remaining unchanged, the increase in cost of living is driving the exit of many expatriate families. Upcoming school closings and summer holidays are only likely to increase this exodus.

Obviously, owners of the 17,000 apartments currently lying unoccupied will be hard pressed to find new occupants in the coming months. 

Meanwhile, analysts cautioned that over the next couple of months, prices could continue to decline, as a result of economic uncertainty, and demand/supply levels in the market. They added that Kuwait real estate market is expected to stand at levels similar to those observed in April, unless the market witnesses positive developments in crude oil prices or economic developments, both locally and globally.

According to the quarterly review by the National Bank of Kuwait (NBK), the real estate market softened in April, sales were down 30 percent y/y as growth in the commercial and investment sectors remained anemic. Though the real estate market ended the first quarter on a positive note, with total sales breaching the KD200 million mark in March, it was still down 17 percent compared to the first quarter of last year.

In particular, investment sector transactions, which accounts for individual apartments and apartment buildings, dropped from 115 in January to 73 in March, a 3 percent decline y/y. The shift in the composition of the investment sales towards less expensive single investment apartments than buildings resulted in a 30 percent decline in quarterly KD sales from a year ago. In line with this shift, sales volume also registered a fall in this sector, going from KD66.8 million at the start of the year, to KD59.8 million at the end of the first quarter, a drop of 27 percent y/y.

Adding to the dampened sentiment in the real estate sector was the decision by the Public Authority of Housing Welfare (PAHW) to distribute most of the 30,000 plots to applicants for the South Mutlaa City. Though construction permits for the distributed plots will not be available until road and infrastructure construction is complete, the allocation on its own has diminished appetite for real estate elsewhere, especially in the residential sector.

According to a development plan follow-up report for 4Q16, work on South Mutlaa project, which is part of the strategic development plan, is so far 12 percent complete.  In March 2017, PAHW awarded the second of four infrastructure contracts in South Mutlaa City to China Gezhouba Group. The contract, valued at KD216 million, is for major infrastructure work and is expected to be completed by March 2019.

On a positive note, inflation in housing services retreated to a multi-year low in line with the softness in the real estate market. Inflation in the housing component, mostly comprised of housing rents, slowed from 6.4 percent y/y in 4Q16 to a three-year low of 4.3 percent y/y in 1Q17. Softer housing inflation has been a key contributor to Kuwait’s recent lower inflation.

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